Chinese authorities have taken their fight for cleaner air in cities up a notch. On Monday, the first wave of output cuts was unleashed on steel-making hubs in the cities of Tangshan, Shijiazhuang, Anyang and Handan.
The 50% cut in sintering fines and pelletizing will affect around 20 million tonnes of steel or 7.5% of China’s national annual output. In the meantime, the authorities have engaged another round of plant inspections in Beijing, Tianjin and 26 other cities until January in enforcing more stringent emissions guidelines among mills.
Besides steel mills, the stricter pollution measures will also affect cement production and slow construction activities and affect production of steel products such as rebar. The impact of output cuts has since caused prices of iron ore to take a free fall just before the Chinese commence their week-long Golden Week holiday .
Guessing game on where the iron ore prices will go. Goldman Sachs predicted iron ore price to fall to USD60/mt by the end of 2017. The projected price correction is due to the anti-pollution measures described above – moreover, more supplies are arriving to China as miners have ramped production.
As a result Goldman Sachs foresees iron ore weakness over the next six months as the bank believes that “the market has not fully priced the negative impact of environmental restrictions”.
Similarly, ANZ bank agreed on the iron ore prices to further to around USD60/mt due to the steel glut in China. In the meantime, Australia’s Commonwealth Bank attributed the price retreat to lower cash flow from the Chinese mills as they are repaying bank loans at the end of Q3 and have less cash for imports at the moment.
Chinese mills well-stock up for the Golden week. China mills have inventories up to 25-30 days on average at the moment, thus lessening their appetite to procure further seaborne cargoes. The high inventory level allows the mills to last through the Golden Week holidays from Oct 1 till Oct 8, unless the iron ore prices have dropped low enough to attract their buying interest.
In the meantime, the build-up for HRC and rebar inventory are high as demand weakened due to strict environmental controls on various industries. During this period, some trade sources predicted that Chinese domestic steel prices, such as the Tangshan billet price will stabilize around RMB 3,400-3,500/mt.
India aims big on scrap recycling. India has set its sights on scrap recycling to reduce its dependency in scrap imports which cost the nation at around USD2 billion annually for shipment of 5-6 million ferrous scrap yearly. The new scrapping policy is targeting 28 million tonnes of old and polluting heavy cars, trucks, and light vehicles for recycling.
It was estimated that India tagged around 8-9 million vehicles for scrapping initially and the volume is expected to double by 2020. According to the country’s steel ministry, India’s ferrous scrap consumption will reach 44 million mt by 2021.
However, the market is concerned that the metal recycling centres have not been planned and materialized yet, leaving the scrapping initiative pretty much on the drawing board. In the long run, India shows lot of potential in ferrous scrapping as the country produced around 3.8 million passenger cars and 810,300 commercial vehicles during the fiscal year to last March.
Tata Steel and Thyssenkrupp agree on merger. Tata Steel and Thyssenkrupp have agreed a preliminary merger of their European steel operations at 50:50 joint venture. The impact of the merger may disrupt met coal and iron ore procurement and supplier strategies, with estimated of steel shipment of around 21 million mt/year.
According to Platts, the 21 million mt/year of steel shipment may account for demand of around 30 million-32 million mt/year of iron ore and around 12 million-18 million mt/year of coking coal and PCI demand.
This merger will allow Tata to move EUR2.5 billion (USD2.99 billion) of debt into the new business and Thyssenkrupp to transfer EUR4 billion (USD4.7 billion) of liabilities – is expected to generate cost savings of between EUR 400 million and EUR 600 million a year once the completed, with efficiencies coming through combining administrative and R&D functions.
India to buy coking coal soon? Indian coking coal buyers might enter the procurement market soon after the recent price retreats. The buyers are likely to bid around USD 190/mt FOB Australia for premium mid-vol cargoes. There might also be some small purchases from the small mills as the bigger Indian mills are known to purchase cargoes every few months.
The Chinese coking coal buyers are pretty silent as it is near their week-long holidays. A trade source indicated that some will want to wait till October to monitor the effect of coke production cuts in the market before making any buying decision.
Chinese interests for coking coal defuse by market uncertainty. Chinese buying interests in coking coal are incapacitated over the uncertainty of production cuts in China under the new environmental protection regulations. This is especially true for Eastern Chinese buyers as the mills there ran the risk of production cuts to comply with environmental emission standards.
Moreover, the coking coal buyers based in Northern China face the import restrictions that limited their purchases. However, the ruling may change toward the end of the month to relax on the coking coal imports as now the first priority is given to thermal coal unloading among the Chinese ports. Besides, there might a burst of trading activity this week right before the Chinese trade participants break for a week-long holiday during the first week of October.
Capesizes market shows mixed outlook. Asia-Pacific Capesize rates have softened from the lack of market activities especially in iron ore shipping after the commodity underwent a recent price correction. A trade source pointed out that it may be still early days before orders come in for the Asia-Pacific routes.
Similarly, little activity was seen in the Australia-Qingdao routes, with only one miner heard to be active at the moment for ship fixtures. On the other hand, the Atlantic basin looks more promising with good volumes shipping out of Brazil that resulted in healthy freight rates.
On the other hand, some believe that the market frenzy for booking fixtures ahead of the Chinese holidays was over and expected a slump ahead. Thus, the true test on the strength of Capesize freight will rely on how the market performs during the China’s golden week holiday period in the absence of Chinese trade participants.
All in all, spot iron ore prices continue to take a beating over concerns of Chinese steel production capacity cuts. Chinese traders seem to have pre-empted this by buying cargoes much earlier, ahead of the seasonal restocking period of Sep-Oct. However, China’s environmental checks are stricter and tougher than all the preparations made for them and the impact may become irreversible even after the Chinese participants return from their holiday.